Economy

Today marks Chapter 11 for General Motors, and its replacement in the DJIA by Cisco. What we can learn from this 'driving while blind' crack-up?

First, let's put on our surgical masks and examine the collapse. For sure, GM was on the sick list for a long time. The late John Z. DeLorean told us so thirty years ago, in his book titled On a Clear Day You Can See General Motors. Early in this decade, The Economist stated quite clearly that global auto production was plagued with 25 percent overcapacity even during good times, and that a bloody shakeout would follow.

But just as the extreme overshoots of stocks in 2000 and 2007 set the stage for the savage bear markets which followed, the extreme overshoot in car sales in mid-decade led to the severe sales drought we have today. The 'zero/zero/zero' rate blowout announced in mid-2003 by the fatuous halfwit Alan Greenspan produced an orgy of overconsumption, much of it borrowed from sales that would have taken place during 2008-2010. GM throttled up during Bubble II to maintain market share. When sales evaporated during the ensuing bust, it was a life-threatening event for a high-fixed-cost dinosaur like GM. It had no place to hide when sales plunged.

And the lessons for today? Both similarities and differences exist. A similarity is that we've gone 'beyond zero/zero/zero' into 'unconventional measures.' However, unlike Bubble II, this rate distortion is not being used to turbocharge auto, housing and retail sales. Instead, it's being used for something far worse -- dumping the next ten years' worth of capital investment into a collapsing Ponzi scheme.

Everyone who's ever escaped from a Ponzi scheme with a profit -- such as those who bailed out of Bernie Madoff's fund two or three years ago -- knows that you have to leave before the first default. Once the cracks in CONfidence appear, it's too late.

By contrast, the Fed/Treasury madmen have pumped capital into Ponzi companies AFTER their collapse -- and they're still doing it. There is almost no chance of this malinvestment yielding a profit. In fact, the socialized financial sector, consisting mostly of nonproductive and even value-subtracting enterprises, over time will actually consume the principal.

When I was invited to give this speech, I was asked if I could give a simple short talk that was “direct, naked, taut, honest, passionate, lean, shivering, startling, and graceful.” Boy, no pressure there.

But let’s begin with the startling part. Hey, Class of 2009: you are going to have to figure out what it means to be a human being on earth at a time when every living system is declining, and the rate of decline is accelerating. Kind of a mind-boggling situation… but not one peer-reviewed paper published in the last thirty years can refute that statement. Basically, the earth needs a new operating system, you are the programmers, and we need it within a few decades.

This planet came with a set of operating instructions, but we seem to have misplaced them. Important rules like don’t poison the water, soil, or air, and don’t let the earth get overcrowded, and don’t touch the thermostat have been broken. Buckminster Fuller said that spaceship earth was so ingeniously designed that no one has a clue that we are on one, flying through the universe at a million miles per hour, with no need for seatbelts, lots of room in coach, and really good food, but all that is changing.

There is invisible writing on the back of the diploma you will receive, and in case you didn’t bring lemon juice to decode it, I can tell you what it says: YOU ARE BRILLIANT, AND THE EARTH IS HIRING. The earth couldn’t afford to send any recruiters or limos to your school. It sent you rain, sunsets, ripe cherries, night blooming jasmine, and that unbelievably cute person you are dating. Take the hint. And here’s the deal: Forget that this task of planet-saving is not possible in the time required. Don’t be put off by people who know what is not possible. Do what needs to be done, and check to see if it was impossible only after you are done.

When asked if I am pessimistic or optimistic about the future, my answer is always the same: If you look at the science about what is happening on earth and aren’t pessimistic, you don’t understand data. But if you meet the people who are working to restore this earth and the lives of the poor, and you aren’t optimistic, you haven’t got a pulse. What I see everywhere in the world are ordinary people willing to confront despair, power, and incalculable odds in order to restore some semblance of grace, justice, and beauty to this world. The poet Adrienne Rich wrote, “So much has been destroyed I have cast my lot with those who, age after age, perversely, with no extraordinary power, reconstitute the world.” There could be no better description. Humanity is coalescing. It is reconstituting the world, and the action is taking place in schoolrooms, farms, jungles, villages, campuses, companies, refuge camps, deserts, fisheries, and slums.

Yet when we parse the data we realize that 25,000,000 Americans are unemployed or underemployed with half a million more coming our way this Friday. The employment situation on an aggregate basis simply does not reflect the devastation of this current recession. A recession that can destroy $11.2 trillion in American household wealth is not a common recession.
It is the case that there are many MSA (metropolitan statistical areas) measured by the BLS that show some regions of our country are already in a deep and profound depression. Out of the top 20 MSAs with high unemployment rates we find that 12 are in California:

There's a new breed of Americans stocking up on canned goods and ammunition. It's not the guy hiding out in a backwoods shack. It's your neighbor.

Jim Wiseman is a fire protection contractor who works "with my hands and the sweat of my brow," and a 54-year-old father of five. He lives about as far away as you can get from Washington, DC, and Wall Street...La Jolla, California.

La Jolla hardly seems the sort of place where you'd find a man stocking his garage for disaster, but Wiseman's not alone.

More Americans who are concerned about the teetering financial system dependent on government handouts are preparing for a potential doomsday scenario. They've been dubbed "Suburban Survivalists," and they're one reason the stocks of companies like Cabela's [CAB 13.47 -0.34 (-2.46%) ] and Big Five [BGFV Unavailable ()] have more than doubled since the start of the year.

"I got involved in this six months ago when I became concerned about the financial meltdown," says Wiseman, standing in a garage piled high with enough canned goods to feed ten people for a year. He was concerned that the government's response to the banking crisis wasn't to let the free markets work, but to hand out money. "If this was our response from the government to fix the problem, then I can't depend on them to provide for me and my family."

In the last six month he's spent about $20,000 on food, a 250-gallon water storage tank, a water filter, medical supplies, a grain mill (which can be operated by hand if there's no power), a generator for his RV, and guns and ammunition. "I believe I'm pretty well set." Wiseman says he spent $6,900 alone on food, much of it from online companies which specialize in disaster kits. "I wanted to get it done before the rush happened," he says, adding that his timing was good. After he started ordering, the companies which make these kits were overwhelmed with orders, and some goods are now on backlog.

Wiseman realizes that not everyone thinks he's acting rationally, but he's not holding a grudge. Those who mock him now may thank him later, as he's intentionally bought more food than his family would ever need. "It's going to be disastrous for everybody, and we have to have compassion for those people who haven't prepared." Wiseman says he knows what it's like to go without. As a child, his mother lived on welfare for a time. "I'm not going to take a chance with my children if (disaster) happens, having to look in their faces when they're hungry and asking for something to eat."

So why not move to another country? "I think America is still worth the investment of our lives, it still is the best country in the world...I have faith that, at some point, 'we the people' will stand up and take our country back."

The food has a 25-year shelf life, but even if he never uses any of it, he calls this a wise investment. "It gives me peace of mind to know that I'm not going to be caught unprepared," Wiseman says. "That is worth all the money I've spent, even if I never need it."

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.

Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases

Given the high (inverse) correlation between interest rates and stock prices, the 1982 to 2000 bull market is much less about productivity, ideology, or deficit reduction — it was about falling interest rates, plain & simple.

It is not every 31-year-old who, in a first government job, finds himself dismantling General Motors and rewriting the rules of American capitalism.

But that, in short, is the job description for Brian Deese, a not-quite graduate of Yale Law School who had never set foot in an automotive assembly plant until he took on his nearly unseen role in remaking the American automotive industry.

From the LA Times: Property tax relief coming for more than 330,000 L.A. County homeowners

...The Los Angeles County assessor’s office this morning announced that it has finished an automatic review of assessments for 473,000 homes purchased between July 1, 2003 and June 30, 2008 -- which account for about 28% of homes countywide.

County officials reduced assessments on about 70% of properties reviewed. Homeowners getting a break should soon get a letter in the mail. The average property tax savings is $1,400 for owners of single family homes and $1,100 for condominium owners, county officials said.

Those receiving reductions included owners of 256,000 single family homes and 77,000 condo owners. The average reduction in value was $126,000 for single family homes; $96,000 for condos.

The reduction in assessments means a loss of $440 million in tax revenue, a 1% drop county officials anticipated in last month’s proposed budget, said Assessor Rick Auerbach.
According to the Case-Shiller home price index, prices in Los Angeles are back to the July 2003 level, and I'd think that just about every home purchased between July 2003 and July 2008 would be worth less today - not just 70%. Unfortunately for homeowners - and tax collectors - prices will probably fall further.

The good news is only 28% of all homes in Los Angeles county were purchased during the height of the bubble! Of course other homeowners probably used the Home ATM (cash out refinance or HELOC) and are underwater too.

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Oh so glad to hear I am not alone (and maybe even further off the edge than that guy).

I got started when I read: GuideTo2013.com and they think it will be a long 5 or more years before the "all is well" sign comes on. That was 2 years ago - before Crude Awakening, Albert Bartlett and all. . . So, what else is going to go wrong?

Jim Wiseman is a fire protection contractor who works "with my hands and the sweat of my brow," and a 54-year-old father of five. He lives about as far away as you can get from Washington, DC, and Wall Street...La Jolla, California.

I first heard about Chris Martenson while attending a meetup at Jim's house. Small world.